This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature a pair of downgrades for Ryder System, Inc. (NYSE:R) and Zions Bancorporation (NASDAQ:ZION) . But the news isn’t all bad, so before we address those two, let’s start with why one analyst thinks…
SanDisk Corporation (NASDAQ:SNDK) is no flash in the pan
Tuesday dawned bright for owners of “flash” memory specialist SanDisk Corporation (NASDAQ:SNDK). The company just announced it will begin selling the “world’s fastest 64GB microSDXC card,” the SanDisk Extreme microSDXC, which the company says is ideal for use in the latest smartphones, tablets and cameras. No sooner had it done so than analysts at Needham & Co. upped their price target on SanDisk stock to $75 — a five-buck bump over the previous target.
Is SanDisk Corporation (NASDAQ:SNDK) worth it?
Although at first glance, 31 times earnings looks like a lot to pay for a stock in the volatile tech sector, SanDisk is one of the leaders in flash memory products — and it’s growing fast. Analysts on average project 28% annualized earnings growth at the company over the next five years — nearly fast enough to justify the P/E ratio. Plus, SanDisk is currently generating cash at a 16% faster clip than the rate at which it reports earnings, generating $544 million in free cash flow over the past year.
At a price-to-free cash flow ratio of 27 today, the stock’s not quite as cheap as I’d like to buy it — but regardless, there’s little doubt that Needham is right about this one: Even after running up 73% over the past year, it’s still not too late to buy. SanDisk Corporation (NASDAQ:SNDK) shares are still cheap enough to buy.
If only we could say the same about the stocks getting downgraded today.
Zion going downhill?
First up: Zions Bancorp. It’s been a good year for Zions shareholders so far, but with their stock up 66% over the past 12 months, analysts at RBC Capital Markets think it’s time to take a step back and consider whether the stock’s really worth it.
Priced north of 23 times earnings, Zions carries a P/E ratio nearly twice that of larger, sturdier banks such as U.S. Bancorp (NYSE:USB) and Wells Fargo & Co (NYSE:WFC). Expected to grow its earnings at less than 8% per year going forward, it’s arguably a poor bet that the company’s weak earnings justify such a valuation — even if Zions does have a cheaper price-to-book-value ratio.